Thursday, January 29, 2015

The new year has gotten off to a lousy start, at least on Wall Street, leaving us to wonder what might have changed. The stock market has been in a bullish warp for nearly six years, after all, blithely oblivious to all manifestations of reality save central bank easing. Lately, however, sellers seem to be dictating the terms.  Are investors, in their supposed collective wisdom, looking ahead and seeing recession or worse on the economic horizon?  We've never believed them capable of such prescience. Much more appealing is the idea that coldly mechanical market cycles color our perceptions of  the economy -- so much so that a steep downturn in stocks can trigger recession, rather than the other way around. Whatever the case, the unaccustomed weakness of the U.S. stock market so far this year is troubling, since damned near everything that matters is riding on the continued, upward drift of share prices.

I suggested waiting for this flying sow to reach a D rally target before shorting it, but in retrospect it was a bad call; we should have shorted the bejeezus out of it at 'p', the 39.08 midpoint Hidden Pivot shown. The opportunity didn't come into focus until I repositioned point 'A' as a one-off rather than at the visually obvious low at 37.26. The effect was to lower p so that it was no longer slightly out of reach, but rather, precisely in line with Monday's high. That was the place to have bought puts, but we won't chase the opportunity. If JNK pops slightly, however, although not necessarily all the way back up to p, I'll recommend buying eight Feb 20 39 puts for 0.45 with 0.05 discretion, contingent on the stock trading 39.08 or lower.  This is a day order, and if you don't understand it perfectly, I'd suggest waiting for a trade that you do. ______ UPDATE (January 29, 9:36 p.m.): In the chat room yesterday, subscribers reported paying up to 0.43 for the puts, so I'll use that price to establish an eight-contract position for tracking purposes. For now, plan on stopping yourself out if the puts trade for 0.30. That would limit position risk theoretically to about $100. Against that order you should enter another to short eight Feb 20 36 puts for 0.43, good till canceled. ______ UPDATE (Feb 3, 10:39 p.m. EST): When the position got stopped out yesterday, I posted the following in the chat room:  "My JNK coordinates were wrong, and it turns out that the p midpoint of a rally pattern projecting to 39.96 lies at exactly 39.08. That means p is still unbreached. Accordingly, I will recommend establishing a new short position by putting up stingy bids for

The bearish ABC pattern shown is so outlandish that we might use it to make the bullish argument that its 1944.00 target is unlikely to be reached. Hidden Pivot aficionados will understand why the target is illegitimate and therefore unpromising. Mainly, it's a matter of the point 'B' low being as sausage-y as they get. For those of you who are unfamiliar with the term, it denotes an A-B impulse leg that has failed to actually 'impulse' beneath a previous low (in a downtrend, as has occurred here), or above a previous high (in an uptrend). Such patterns do not usually work, and even when they do, the targets and midpoint pivots they yield cannot be relied on to provide precise swing points.  And yet, I wouldn't hesitate in this case to recommend bottom-fishing aggressively at 1944.00, using a stop-loss as tight, perhaps, as five ticks. For now, however, I'll simply assume that the target is out of bounds and that the futures are due for a rally beginning somewhere above 'B'.  A flimsy pretext, I know. Take a good, hard look and decide for yourself. There is no mystery about the pattern; it is what it is.